BEST PRACTICES - Although not an exhaustive list, below are some important best practices for a lender to earn maximum returns and reduce risk in servicing its commercial real estate loans.
How a Professional Servicer handles loans:
Loan Setup – Gathers loan data from the documents rather than relying on the Servicing Tape”. This practice can uncover errors in loan setup that may increase a lender’s earnings.
Billing – Creates detailed billing statements. A properly constructed billing statement includes information on additional fees and is a reminder to the borrower to make payments promptly. Use email and online systems to deliver the billing statements. You can also embed marketing information into your billing statements. Ask your servicer
Collections – Collects Early and Often. It is essential to actively collect loan payments when due. As soon as the payment is delinquent, it is important to assess late fees (you can always waive them later) and reach out to the borrower. Staying top-of-mind may get you paid before other vendors. A professional servicer may have time for this if you don’t.
Cash Reconciliation – Reconciles daily. Doesn’t let cash-to-bank balancing linger. It is important to balance the servicing system to the bank accounts daily. Letting cash get out of control can lead to huge, costly and sometimes legal problems.
Tax & Insurance Escrows – Sets up a separate escrow account for each borrower. It may be too much work for a lender but it is standard servicing.
Tax Monitoring – A good servicing system allows tracking of taxes due. Good servicing requires follow-up to determine if taxes are paid and prevents tax liens.
Insurance Monitoring and Analysis – If a borrower does not make its payments, you can foreclose. If real estate taxes are not paid, there is time to cure. If a building burns with no insurance, you have a vacant lot. AN UNINSURED CASUALTY IS THE BIGGEST RISK FACING A LENDER. It is important that a lender understands if proper insurance is carried by the borrower.
Real Estate Analysis – Servicing is about getting repaid. We bill and collect to get cash returned. We monitor taxes and insurance to make sure the government cannot take the borrower’s property or that the property is not lost to an uninsured casualty. With Real Estate Analysis, we monitor the operation of a property to insure the lender can get paid into the future. A good servicer has processes to collect and analyze rent rolls and operating statements and present analysis to uncover any operating problems.
Reporting – Proper servicing generates huge amounts of data. Data is only useful if organized and presented in a timely manner or on demand. A good servicing system has good reporting capabilities for both the lender and borrowers.
SUMMARY - Proper servicing practices are designed to maximize collections and minimize risk. Executing servicing processes requires consistency and good systems. If you service your own loans an investment in people, systems or outsourcing to a professional servicer may return earnings that exceed the investment.